Today at lunch with James I rattled off a story about Netflix that I have been telling lots of people lately for some reason. Basically the story is that even though it would seem like Netflix would rather you had a subscription and never rented anything, it’s quite the opposite. After lunch I told James I would find that quote, and what do you know, I did. It’s from that Napoleon Dynamite Netflix prize article from the New York Times last year. Here’s the quote:

For Netflix, this is doubly important. Customers pay a flat monthly rate, generally $16.99 (although cheaper plans are available), to check out as many movies as they want. The problem with this business model is that new members often have a couple of dozen movies in mind that they want to see, but after that they’re not sure what to check out next, and their requests slow. And a customer paying $17 a month for only one movie every month or two is at risk of canceling his subscription; the plan makes financial sense, from a user’s point of view, only if you rent a lot of movies. (My wife and I once quit Netflix for precisely this reason.) Every time Hastings increases the quality of Cinematch even slightly, it keeps his customers active.

Even though logic would success Netflix could make more money if people rented less, the cost of it is increased turnover. At lunch we spent a bit of time thinking about other industries where you could make this case. Customer service is a really obvious one: In industries/categories where folks interact with customer service a lot (can’t think of any right now), the benefit of investing there might overcome the cost of turnover.

I love this sort of business logic. It means that your best interests are aligned with your consumers best interests and everyone is happier (though, of course, Netflix would always rather you upgraded your plan and it’s sort of interesting to think about how they promote the one DVD plan versus the one DVD plus streaming plan, where overall they want you to get your money’s worth but they probably assume you wouldn’t cancel the streaming option even if you didn’t use it).